Failure Of Mergers And Acquisitions

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In this article we have analyzed the causes of merger and acquisition failures. One cause is the bullish stock market, while another is that merging companies may belong to diverging corporate cultures.

Mergers and acquisitions may seem to be beneficial, resulting in the amalgamation of two conglomerates. They have been found to lead to cost cuts and increased revenues. However, merger and acquisition failures are not uncommon. These failures may harm the companies, tarnish their credibility in the market, and ruin the confidence of their shareholders.

Studies reveal that approximately 40% to 80% of mergers and acquisitions prove to be disappointing. The reason is that their value on the stock market deteriorates. The intentions and motivations for effecting mergers and acquisitions must be evaluated for the process to be a success. It is believed that when two companies merge the combined output will increase the productivity of the merged companies. This is referred to as “economies of scale.” However, this increase in productivity does not always materialize.

There are several reasons merger or an acquisition failures. Some of the prominent causes are summarized below:
If a merger or acquisition is planned depending on the (bullish) conditions prevailing in the stock market, it may be risky.
There are times when a merger or an acquisition may be effected for the purpose of “seeking glory,” rather than viewing it as a corporate strategy to fulfill the needs of the company. Regardless of the organizational goal, these top level executives are more interested in satisfying their “executive ego.”
In addition to the above, failure may also occur if a merger takes place as a defensive measure to neutralize the adverse effects of globalization and a dynamic corporate environment.
Failures may result if the two unifying companies embrace different “corporate cultures.”
It would not be correct to say that all mergers and acquisitions fail. There are many examples of mergers that have boosted the performance of a company and addressed the well-being of its shareholders. The primary issue to focus on is how realistic the goals of the prospective merger are.